BIR Ruling [DA-212-99]

April 7, 1999 BIR RULING [DA-212-99] Cathay Metal Corporation 23rd Level, Galleria Corporate Center Robinson Galleria Complex EDSA corner Ortigas Avenue Quezon City Attention: Mr . Noel Calibo Gentlemen : This refers to your letter dated January 18, 1999, requesting in effect for a ruling that the proposed transfer to Cathay Metal Corporation (Cathay) of 276 parcels of agricultural lands pursuant to a joint venture agreement with its registered owners is exempt from the payment of capital gains tax, documentary stamp tax and other applicable internal revenue taxes. LLphil It is represented that Cathay and the farmer-beneficiaries/registered owners, collectively referred to as LANDOWNERS who each own certain parcel of agricultural land duly registered with the Register of Deeds of Cavite ("PROPERTIES") entered into an agreement for the development of the Properties; that taken altogether, the Properties total 231.2972 hectares in area, more or less; that these parcels of land were converted from agricultural into mixed-use classification by virtue of DARCO Conversion Order No. 040218014-(198)-98, Series of 1998 issued by the Department of Agrarian Reform; that the LANDOWNERS entered into a Joint Venture Agreement with Cathay as developer for the development of the properties into an industrial-residential mixed-use complex ("PROJECT"); that the Joint Venture Agreement essentially stipulated as follows: a. The LANDOWNER shall provide the property which would be developed into a residential, commercial or industrial estate by the DEVELOPER; b. The LANDOWNER and DEVELOPER shall jointly undertake the conversion of the PROPERTIES from agricultural to residential, commercial or industrial use; c. The total area comprised of the different PROPERTIES belonging to the different OWNERS shall be considered as one indivisible whole, with each OWNER acquiring an interest ("Participating Interest") in the developed PROJECT corresponding to the proportion that the aggregate area of its Property, regardless of location, bears to the total land area of the entire consolidated PROJECT; d. As its contribution to the PROJECT, DEVELOPER shall provide for the improvements and facilities consisting of all concrete roads, concrete curbs and gutters, sidewalks, etc., all expenses of which shall be solely for the account of DEVELOPER; e. In consideration of, and in return for, the respective contributions of the DEVELOPER and LANDOWNERS, the latter shall be provided participating interest in the PROJECT equivalent to two (2%) of all the component portions of the entire consolidated project while DEVELOPER shall be allocated an equity participation equivalent to ninety-eight percent (98%) of the project. The 2% LANDOWNER'S share shall be further divided among the different OWNERS in accordance with their respective Participating Interest in the PROJECT; and in addition, the LANDOWNER and members of his family shall have priority in the employment in the proposed residential, commercial or industrial estate; That simultaneous with the execution of the Joint Venture Agreement, the LANDOWNERS likewise agreed as follows: a. That the LANDOWNER shall execute a Special Power of Attorney authorizing the DEVELOPER or any of its duly designated officer to apply for the conversion of the PROPERTY from agricultural to residential, commercial or industrial use with the Department of Agrarian Reform and all its participating government agencies; b. That the LANDOWNER agrees and undertakes to sign, execute and deliver any and all documents, papers, deeds and agreements which may be necessary to effect the provisions of the agreement; and to convey, transfer and consolidate title covering the Property into one or two mother titles solely for the purpose of the preparation by the DEVELOPER of the Master Plan for the development and construction of the PROJECT; and That a copy of an executed Joint Venture Agreement is being submitted which shall be representative of the agreement which the DEVELOPER shall execute with all participating landowners under the PROJECT. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, as amended, the term corporation includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), association or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction project or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. Thus, it is our opinion that the joint venture of Cathay and the LANDOWNERS is not subject to the corporate income tax under Section 27 of the Tax Code. However, the co-venturers are separately subject to the regular income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Considering the foregoing, your opinion that the Joint Venture Agreement executed by the LANDOWNERS and Cathay for the construction and development of the entire consolidated properties into an industrial-residential mixed-use complex and the allocation of their respective Participating Interests in the PROJECT will not create a taxable joint venture within the meaning of Section 22 (B), in relation to Section 27 (A), of the Tax Code of 1997 and that the allocation between and among the parties of the developed lots as their Participating Interest in the PROJECT, as stipulated in the Joint Venture Agreement, is not a taxable event and is not subject to income/expanded withholding tax, is hereby confirmed. (BIR Ruling No. 010-96 dated January 23, 1996). In fine, the transfer of the real estate properties to Cathay for purposes of consolidating title into one or two mother titles solely for the purpose of the preparation by the Developer (Cathay) of the Master Plan for the development and construction of the Joint Venture Project is not subject to capital gains tax nor to the expanded withholding tax. Moreover, Section 185 of the Revised Documentary Stamp Tax (DST) Regulations (Regulations No. 26) provides that "conveyance of realty not in connection with a sale, to trustees or other persons without consideration are not taxable". Accordingly, since the Joint Venture Agreements and the Deeds of Conveyance conveying properties in favor of Cathay are without consideration and are not in connection with a sale made to Cathay, no DST under Section 196 of the Code is payable and collectible. However, the acknowledgment to said instrument is subject to DST of P15.00 pursuant to Section 188 of the Tax Code. (BIR Ruling DA-065-97) However, when the parties subsequently sell or dispose of the developed lots which they received or will receive (as in the case of pre-selling) as their respective shares or Participating Interests in the PROJECT to third parties, the gain that may be realized by Cathay and/or the LANDOWNERS from such sale will be subject to the regular rate of corporate income tax under Section 27 of the Tax Code of 1997, or to the tax imposed under Section 24(c) of the same Code, in the case of individual owners, and to the creditable/expanded withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group